Large pub chains at risk of serious financial damage

Pubs face twin risks from consumer weakness and rising input costs, leading global banking giant HSBC to downgrade its ratings for JD Wetherspoon and Greene King last week.

In a review of the pub sector, HSBC warned increased costs faced by the pub sector put the trade at risk of serious damage if a financial crisis was to occur.

“We can’t be sure of a consumer downturn, but do worry about the continued increase in costs and the ease with which this can be mitigated,” it said in a financial analysis.

“Operators have already struggled with this even in a benign consumer environment,” it continued. “We don’t see obvious valuation support and think downgrades will drive share price weakness.”

Consumer financial stability​

Consumer research carried out by HSBC showed pubs that had introduced a strong food offer to counter the decline in their wet trade would not be as safe as expected if consumer financial stability rocked.

Some 30% of respondents to the bank's Toluna Analytics Survey said eating out would be the first area they would cut spending if money was tight. However, just 15% of respondents said they would cut drinking out.

To put the risk into perspective, the banking group broke the food and drink sales split of the four biggest pub restaurant chains – Greene King, JD Wetherspoon, Mitchells & Butlers and Marston's – down.

Greene King's wet:dry split was estimated to be 54:42, while Wetherspoon’s is 61:35, Mitchells & Butlers’ 49:51 and it is 42:58 at Marston's.

Large pub restaurant chains​

It was further claimed sales in the sector, particularly among the four large pub restaurant chains, were already sluggish and under threat.

“Pubs talk of eating/drinking out being an 'affordable treat' that would not be badly impacted in a consumer downturn,” the report said. “They aren’t especially cheap to eat in and therefore face a risk to income.”

The report continued: “We downgrade our rating on Greene King to 'Reduce' (from 'Hold') on concerns over its cost outlook in particular.

“We think that JD Wetherspoon (downgrade to 'Hold') is best placed to trade through the weakness, though the strong share price performance means it’s no longer cheap in the circumstances. We remain 'Hold' on Marston’s and M&B.”